Debt is a primary driver of financial stress, and anyone struggling with it might assume the last thing they need is to borrow more money. However, the right personal loan at the right time and the right rate could help them reduce or even eliminate their debt and the stress it brings.
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Here’s how a personal loan could help you slash your debt without adding to your financial anxiety.
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It Can Unify Many Debts Under One Roof
According to Forbes, debt consolidation is one of the main reasons people take out personal loans. Even if the loan doesn’t lower the interest rate or otherwise reduce the financial burden — which it can and should — it can dial down the financial pressure by combining multiple debts into one, which eases the stress of managing a monthly barrage of scattered payment deadlines, the next one always seeming to come on the heels of the last.
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It Can Offer Relief From High Interest Rates
The calm that comes with consolidating many far-flung due dates into a single monthly payment is good, but combining that with interest rate reduction is much better — and the right personal loan can do that. According to the St. Louis Fed, the average interest rate on personal loans is 11.66%. The average credit card rate, on the other hand, is 21.37%, meaning that a decent personal loan can cut your high-interest credit card finance charges by nearly half.
Predictable Payments Can Pave a Path to Debt Elimination
Combining several payments into one is part of why personal loans can be helpful debt-reduction tools. Lowering high interest rates is another — but the type of interest matters, too.
Credit cards charge variable APRs on revolving balances that compound daily. That makes it hard to budget and plan from one month to the next, particularly when you’re battling multiple balances simultaneously. Personal loans, on the other hand, typically charge fixed-rate APRs with set monthly payments that never change, providing one of the most crucial necessities for debt elimination and financial stress relief — predictability.
A Few Extra Bucks Can Set You Free Early
Personal loans can help you manage debt, but those that don’t charge early payoff fees can put even more power in the borrower’s hands by applying any extra payments directly to the principal — and a little can go a long way.
For example:
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A borrower takes out a $10,000 personal loan with the Fed average APR of 11.66%.
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The monthly payment is $250.
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The loan will take 51 months to repay.
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The borrower will pay a total of $2,723 in interest.
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However, if the borrower adds just $25 to each monthly payment, the debt will be eliminated in just 46 months with only $2,397 in finance charges.
Responsible Use Can Boost Your Credit and Make Borrowing Cheaper for Life
A personal loan can immediately reduce your revolving balances and lower your credit utilization ratio, which can boost your score relatively quickly. Over the long term, however, you can watch your score rise and rise some more as you make on-time payments and reduce your overall debt, building your overall credit health and ensuring that the next time you borrow, you’ll get lower rates and better terms.
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This article originally appeared on GOBankingRates.com: 5 Ways a Personal Loan Can Help You Slash Your Debt Without Adding Stress
